From Inflation To War Here's What CRE Experts Saw Coming (And Didn't) In 2022

CRE Experts' Predictions For 2022 Were Way Off — And Right On

Many in the commercial real estate world started the year with the global ripple effects of the omicron variant top of mind. But as pandemic restrictions in much of the world have lifted – with the notable exception of China – new concerns have come to dominate conversations about CRE.

While some in the world of commercial real estate predicted economic headwinds after 2021's surprisingly strong year, few were prepared for the volatility of 2022.

Chief among them is the Federal Reserve's rapid pace of interest rate hikes in response to historic inflation, which appears to be finally cooling from this year's record highs.

The factors leading to runaway inflation, including Russia’s invasion of Ukraine, continue to play a role in the real estate sector in ways that weren’t foreseen in January.

Some early predictions proved incorrect: Despite the seemingly mounting political consensus, 1031 exchanges and the carried interest tax loophole were not ended by President Joe Biden’s marquee infrastructure bill. And despite continued industrial demand and the mushiness of today’s office market, developers have yet to trade suburban office parks for warehouses.

In January, Bisnow polled CRE experts for their takes on what would be the dominant trends of 2022. Below, we break down what they got right and what they missed.

Correct prediction No. 1: Rising inflation will compound rising construction costs, resulting in a slowdown or cancellation of some developments.

 

One of the most dominant storylines this year was inflation reaching the highest levels in decades, fueled in part by rising housing prices. The rapid increase in the cost of goods this year forced construction projects with tight budgets back to the drawing board.

In January, Behring Co. founder and CEO Colin Behring correctly predicted that inflation would mix with already rising costs for materials and labor to create bracing construction headwinds, adding: “Projects that were already struggling will be shelved for the time being.”

But Behring also predicted that “only certain areas and asset types will be affected materially,” which proved too optimistic of an outlook. Even the “darlings of real estate,” industrial and multifamily properties, saw their outlooks dim this year due to persistent inflation, Moody’s Senior Economist and Director of Economic Research Thomas LaSalvia told Bisnow in September.

The true effects of today’s difficult economic environment are expected to ripple into 2023. Dodge Construction Network expects the number of multifamily units under construction to be up 16% in 2022 compared to the previous year, but it expects a 9% decline in 2023 due to the effects of rising costs and turbulence.

Correct prediction No. 2: The hotel market will hit new records in 2022. 

Revenue per available room and average daily rates for hotels nationwide have surpassed pre-pandemic records, propelling the sector to an improbably strong year. Between 2020 and 2021, transaction volume rose from $8B to roughly $40B, and the sector appears poised to come close to $40B again this year, if not a bit below it, said Wei Xie, the East Region research lead for JLL.

That recovery, which Xie called “remarkable,” emphatically outpaced the hotel sector’s recovery following 9/11 and the Great Financial Crisis, despite the choppy credit markets in the latter half of this year.

“It took a substantially longer time period to go from the bottom to the peak” in previous crises, Xie said. “I think it's the remarkable speed in terms of recovery, which is driven by the fundamentals.”

The hotel investment sales market appears to be cooling. Despite the sheer volume of trades this year surpassing 2019 levels, the third quarter began to see properties selling at discounts compared to high points set earlier this year, according to a report from LW Hospitality Advisors. The firm predicted a near-term downward pressure on values, though it noted the cost of borrowed funds remained relatively low.

“A tremendous amount of equity earmarked towards the lodging sector remains available, and asset sales are anticipated to continue at a robust albeit reduced pace,” the report found.

Whiff No. 1: Industrial developers will target large office campuses as new sources of industrial development opportunities.

 

151 and 153 Taylor St. in Littleton, Massachusetts, where an office building was demolished and replaced with an Amazon distribution center.

Despite rising distress in gateway office markets around the country, industrial developers have yet to target such properties for redevelopment in a concerted way. In fact, the industrial market faced headwinds of its own, in part because e-commerce giant Amazon acknowledged it had overbuilt capacity by late summer. The subsequent pullback impacted dozens of properties and led to anger in cities like Philadelphia that had bet on Amazon as a job creator.

Even in the mid-Atlantic region centered around Washington, D.C., which is facing some of the most dire warnings about its central business district of any major market in the country, there were zero industrial adaptive reuse projects of large office campuses, according to CBRE Mid-Atlantic Research Director Stephanie Jennings. Jennings said developers are instead targeting struggling retail properties, which are more plentiful along the Baltimore-Washington corridor and elsewhere.

In many places, an office-to-industrial conversion would likely require a zoning change. That is something Xie said municipalities aren't incentivized to do, given the economic benefits of office workers.

Whiff No. 2: The end of 1031 exchanges and the carried interest tax loophole will cause headwinds for CRE.

In the end, it was the great threat that wasn’t — despite early drafts of the Inflation Reduction Act of 2022 removing the carried interest tax loophole often used by some of the largest CRE investors, a proposal that would have closed the loophole was carved out of the final version of the bill thanks to an agreement with Arizona Sen. Kyrsten Sinema.

1031 exchanges were also safe after the world of commercial real estate rallied in favor of the longtime program, ensuring firms can continue to avoid capital gains taxes on certain sales.

And despite a prediction that new spending from the infrastructure and Covid relief bills would have little effect on commercial real estate, there may be some positive knock-on effects as federal dollars are disbursed, said Collete English Dixon, executive director of the Marshall Bennett Institute of Real Estate at Roosevelt University.

“Infrastructure that is used to improve transit systems and water systems and things like that, those are ... improving the environment in which the real estate industry operates,” Dixon said.

Surprise No. 1: The Russia-Ukraine War impacted energy prices, supply chains, and commercial real estate writ large.

 

CRE professionals could be forgiven for failing to predict Russia’s invasion of Ukraine early this year, but pricing in the war’s costs as it drags on has become unavoidable. Impacts on the supply chain and energy, in particular, have helped fuel inflation and negatively impacted property types like data centers.

Many countries around the world moved quickly after the invasion to impose sanctions on Russian billionaires, seizing properties in places as disparate as Baton Rouge, Louisiana, and London. The war also forced companies to make decisions about doing business in Russia, with several firms, including CBRE, Savills, and Knight Frank, shutting down their Russian offices.

The flight of millions of Ukrainian refugees has also put a strain on local housing markets. In Ireland, the influx of roughly 200,000 Ukrainians put pressure on lawmakers to consider a vacant homes tax and temporarily house refugees in camps. In the United States, a nonprofit network that formed first to handle an influx of Afghan refugees broadened its embrace to welcome Ukrainian refugees, sometimes bending the rules for the sake of accommodation.

Surprise No. 2: The Federal Reserve went on an aggressive interest rate hiking campaign.

Though some saw rising inflation on the horizon, few predicted how forcefully the Federal Reserve has responded. The streak of four consecutive increases of the federal funds rate by 75 basis points is the most aggressive campaign of rate hikes since the stagflation era of the 1970s and 1980s. It has already contributed to a 13% decline in values across U.S. commercial real estate.

Roosevelt University's English Dixon said the market had already begun pricing some level of inflation and interest rate hikes into deals, acknowledging the hypercharged market in 2021 was at least in part a pandemic-era fluke. But she said the Fed caught the industry off guard.

“The extent of that increase, how big it was, how consistent it was, it was like, ‘Whoa, give me a second here, I've got to catch my breath,’” English Dixon said. “It hit everybody.”

There are some signs the campaign may be easing as the year winds down. The year-over-year increase in the consumer price index was 7.7% in October, down from 8.2% the month prior, a sign that the higher interest rates may be starting to have the Fed’s desired effect on inflation. That has led some to predict that the Fed may not institute another 75 basis point hike at its next meeting on Dec. 13 and 14.

There are also some signs that Federal Reserve Chairman Jerome Powell may be willing to back off his aggressive interest rate campaign soon as the market adjusts, English Dixon said. If so, that would make the aggressive campaign that began in March a defining but unique characteristic of 2022.

“I think a lot of times, you just consider how many levers you have and if that was the only one you think is effective. But it was just too harsh,” English Dixon said. “I think it will be unique this year. At least, God, I hope so.”

 

Source: From Inflation To War Here’s What CRE Experts Saw Coming (And Didn’t) In 2022

https://www.creconsult.net/market-trends/from-inflation-to-war-heres-what-cre-experts-saw-coming-and-didnt-in-2022/

Co-living the solution to rising apartment rents?

Illinois Real Estate Journal recently spoke with Chicago-based Structured Development and Mark Goodman & Associates to round up the year and discuss up-and-coming trends as they relate to their most recent projects.

Multifamily/Mixed-Use
With thousands of units delivered this year alone, some might call it a year for the books. The market itself remained strong, with rent up about 9% in Chicago YOY. Because of the delay in units being delivered. As a result of continued economic roadblocks, rent is predicted to remain robust throughout 2023.

Trends included an emphasis on co-living and mixed-use, and Chicago-based Structured Development is working on a project that encompasses both, according to Mike Drew, Founding Principal.

As part of The Shops at Big Deahl, a $250 million mixed-use, mixed-income complex being built in Chicago’s Lincoln Park, Structured Development is adding three new multifamily buildings sited on a half-acre, newly constructed park at 1450 N. Dayton St., bounded by Blackhawk, Dayton and Kingsbury Streets.

One of the buildings, Common Lincoln Park, is a 10-story, 400-bed co-living community—the first of its kind in the neighborhood—that will offer one to four private bedrooms per shared apartment, each furnished, and will include a shared kitchen and living space, as well as in-unit laundry. Many of the units will have en-suite bathrooms and all residences will share access to a fitness center, community lounge, screening room, and the building’s various coworking spaces, built to accommodate the increase in people working from home.

Although the units are market rate, co-living is more affordable by nature. Drew said the typical monthly rent of a unit in the building is about $1,500–1,600, versus $2,300–2,500 per month for a comparably-sized studio in the same neighborhood. It’s convenient living, especially for newcomers to the market or young professionals looking for a community-based, social atmosphere.

Another draw? Shorter leases are offered portfolio-wide, with the average term length between 10 and 11 months.

Common Lincoln Park is expected to come online in a few months for occupancy in April 2023, but the journey to build hasn’t always been smooth, as has been the case with many projects across Chicagoland.

According to Drew, Structured Development took a hit after buying the portfolio due to a higher construction cost, but considering the continually rising inflation rate, the price was locked in at the right time.

Office
Office in Chicago has been slow to bounce back, but the numbers have improved since the beginning of the year, with occupancy up 5–10%. More recently, leasing agents have experienced lulls in demand, but most people share the same belief: it will come back with a new strategy from both owners and users.

Mark Goodman, President of Chicago-based Mark Goodman & Associates, said the key to a successful office building going forward is a well-rounded and unique amenity package, like that offered in newer, higher-quality assets like Fulton Market’s 167 Green Street, a 645,000-square-foot dog-friendly building with a hospitality-inspired lounge, rooftop garden, and on-site parking, to name a few. 167 Green Street even has a full-size basketball court, an extreme amenity, but it sets a standard, nevertheless.

Mark Goodman & Associates is currently working with a company that surveys employees to identify the demands that will differentiate their projects from others, but Goodman added that the responsibility doesn’t fall solely on the building owner. It’s up to the businesses, too, to establish a company culture that attracts employees to the workspace.

“Employees are unable to form an attachment to where they work,” Goodman said, “if they don’t have a relationship with their co-workers” that goes beyond the screen.

But this might sort itself out in time as businesses continue to figure out what works and what doesn’t. Some aren’t requiring people to work in office at all, while others are, and many maintain the option that the latter will perform better across the board. How long it will take for businesses to share the same view is unknown.

“That’s not the case now because employees want flexibility, but if businesses that require in-office attendance perform better than those that don’t, eventually that will begin to take hold,” Goodman said.

 

Source: Co-living the solution to rising apartment rents?

https://www.creconsult.net/market-trends/co-living-the-solution-to-rising-apartment-rents/

One of the Biggest Multifamily Real Estate Deals in Chicago History

In one of the biggest multifamily real estate deals in Chicago history, New York-based Emerald Empire bought the local portfolio of Pangea Properties in a sale exceeding $600 million.

Pangea, one of the city’s largest landlords, is unloading its Chicago properties which include about 7,500 units across more than 400 buildings that its co-founder, longtime area businessman Al Goldstein, worked to assemble in the wake of the Great Recession. He focused mostly on acquiring distressed properties in the South and West sides of the city, buying some of them for less than $20,000 per unit. Since then, the firm has sold very few buildings.

The seller’s move to cash outcomes at a significantly higher price per unit exceeding $75,000, according to a person familiar with the deal. Neither Emerald nor Pangea would confirm the exact price tag. The parties entered into a contract in early May, according to a joint statement from the companies. Pangea’s Indianapolis and Baltimore holdings of thousands more apartment units were not involved in the transaction.

“Emerald has been impressed with Pangea’s operations and long-term strategy for some time,” Emerald principal Moshe Wechsler said in the statement.

Pangea employs about 500 people, its CEO Peter Martay said, and they will be kept on to manage the properties for Emerald.

For Emerald, the acquisition marks a significant expansion of its Chicago-area holdings, which already included multiple multifamily properties in both the city and the suburbs, including the four-story, 37-unit Onyx at North Shore property.

Some of the structures of Emerald’s newly purchased portfolio are similar to its existing Chicago assets but now extend into the South and West sides of the city. The portfolio Pangea is moving on from is primarily mid-market to formerly rundown buildings with dozens of units. The firm, however, invested in renovating its properties while they were under its ownership.

While details of the loan haven’t yet been made public or disclosed by Empire, the sale is being financed by an Arbor Realty Trust team, including Hamir Ramolia and Maurice Kaufman.

The deal moved forward even as Pangea is being sued by tenants in a Cook County Court complaint that was brought over the summer. While the suit is still pending and no major decisions have yet been made on the next steps for the case, it alleges Pangea risked the safety of tenants by ignoring requests for repairs and racking up thousands of city code violations, including for infestations of rats and insects and failing to provide working heating in the wintertime.

Pangea said at the time that the allegations were unfounded. The lawsuit had no impact on the real estate transaction, the parties said.

 

Source: One of the Biggest Multifamily Real Estate Deals in Chicago History

https://www.creconsult.net/market-trends/one-of-the-biggest-multifamily-real-estate-deals-in-chicago-history/

CRE Beware: Niche Markets, Specialized Talent Will Win Big In 2023

In the weeks following a tough round of cost-cutting and layoffs, there’s plenty to lament in the commercial real estate industry, but for certain niche markets, property types, and service lines, these recessionary market conditions present a set of opportunities in the coming year.

Funding and investment will shy away from the battered office market and toward alternative opportunities, such as asset and portfolio management, distressed assets, and housing alternatives.

The money will also follow firms and brokerages with adequate talent and experience to tap into these smaller sectors and those with the management expertise to make the most of existing portfolios as deal counts decline, according to analysts and industry leaders.

“These niche sectors are becoming mainstream in the sense that people see them truly as a place to invest," said Anita Kramer, senior vice president at the ULI Center for Real Estate Economics and Capital Markets.

But these concentrated sectors often have limited room for growth, increasing competition between a larger pool of investors looking to branch out and perhaps chase the same deals, Kramer said.

“The options are shrinking, but the right option can be very good,” she said. “There’s a sense that these opportunities aren’t as big as the major sectors.”

Existing portfolios, placed under more pressure to perform, will help shape the job market, and firms will hire differently, said Spencer Burton, Stablewood Properties partner and head of real estate developments.

The economic and interest rate environment has placed many investors in a wait-and-see mode, suggesting that there will be a higher value placed on the performance of asset managers and portfolio management, especially in the near term, he said. Moving into a new cycle will also place more value on those who can work with debt and distressed property.

“The big opportunities for 2023 will be in forced asset sales and distressed debt,” Bullpen CEO Tyler Kastelberg said. “We're hearing more and more murmurs about sponsors being required to put more cash into a deal in order to refinance it out of a bridge loan into long-term debt. When they can't come up with the cash, they are forced to put the property on the market. Per some of my broker contacts, this is becoming more and more common.”

This means asset managers are going to “be the star of the show,” he said, as distressed assets typically require a greater degree of management and a steady hand to turn around.

Another risk factor portfolio owners will seek to mitigate is climate change, BREEAM U.S. Director of Operations Breana Wheeler said. Investors, especially those operating in high-risk regions with older, less stable assets, will seek to remedy these risks by allocating increased capital toward retrofit projects that improve operational efficiency, mitigate physical climate risks, and address transition risks. like potential obsolescence and rising insurance costs.

“This will be especially important to investors as legislation passed in 2022, like the Inflation Reduction Act, and new regulations looming for 2024, like the pending enforcement of Local Law 97, concurrently amplify the fiscal penalties and financial rewards associated with heavy building emissions and emission reduction,” Wheeler said.

Amid these different sources of uncertainty, the relationship between tech, data, and real estate, specifically how better data analysis can support or supplant decision-making in an industry that likes to think it runs on experience and intuition, will put data scientists in much higher demand, Burton said. It has been a consistent theme in CRE hiring outlooks, especially during downturns, that the industry’s slow adoption of tech and desire for more certainty means data-driven decision-making is becoming more vital.

“It's kind of a reshuffling of the deck as we move into a new cycle,” Burton said. “Your growth is going to come from noncore subtypes, so if you’re an employee with those skills, there’s a real opportunity.”

Self-storage is one of many niche property sectors expected to see rising investment in 2023.

Burton pointed to self-storage, student housing, build-to-rent, and single-family rental, as well as manufactured housing, as subsegments in which demand, in many cases due to a growing rental population, will increase the need for specialists in alternative housing types. There’s increasing demand for the institutionalization of these subtypes, so those who understand the financing behind these transactions will be very busy.

“We think of real estate in terms of strategy, sponsor, and structure: Strategy is someone who understands the property types and opportunities,” he said. “A sponsor is someone who understands how to operate the property, and structure is an individual experienced in the capital and capital stack. It’s going to be all of the above that have opportunities over the next decade.

The growing need for rental properties will also continue to fuel growth in multifamily, AmTrustRE President Jonathan Bennett said. Space constraints will mean that entrepreneurial developers will need to work with municipal and zoning boards to increase potential development sites that feed the country's housing stock and focus on conversions.

“As the conversation around office-to-multifamily conversions progresses, we can definitely expect to see traditional commercial developers shift a portion of their focus to apartment properties,” Bennett added. “Investors and developers without a significant multifamily track record will likely seek to partner with multifamily specialists that already have the expertise needed to successfully take on apartment development, or look to hire internally and expand their company’s core competencies from the inside out.”

Industrial, a powerhouse during the pandemic e-commerce boom, has seen retrenchment in recent quarters, but Kramer predicts more focus on the complexities of reshoring supply chains and building up backstock of supplies to overcome any supply chain hiccups.

Another aspect of industrial that shouldn’t be overlooked is manufacturing and onshoring, Burton said. From a real estate standpoint, the growth in new factories and manufacturing centers will require specific land acquisition and construction and development, but he also predicts more business for business development and location specialists, as well as those who understand how to build new housing for the growing workforces these centers will attract.

And finally, the office shouldn’t be completely written off. While there will be plenty of Class-B and C spaces, especially in certain central business districts struggling for tenants, there’s still a healthy, albeit limited, appetite for trophy office space. Footprints will be smaller due to large shifts to hybrid work, but the sector has become highly bifurcated, ULI’s Kramer said, with tenants seeking smaller, higher-quality spaces. Brokers who can understand new workplace realities and deliver on the need for high-end, shorter-term, quick-to-activate leases will do well, as well as designers and architects focused on spec offices and renovations.

“In addition to highly amenitized workspaces, companies will be interested in flexible lease terms for an office where they can expand or condense as needed, without compromising best-in-class features, to help them weather continued changes in the workforce and the broader economy,” Inspired by Somerset Development President Ralph Zucker said.

 

 

Source: CRE Beware: Niche Markets Specialized Talent Will Win Big In 2023

https://www.creconsult.net/market-trends/cre-beware-niche-markets-specialized-talent-will-win-big-in-2023/

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2023 State of The Commercial Real Estate Industry

oin eXp Commercial President James Huang and Economist KC Conway on January 17 for a fireside chat as they discuss the state of the 2023 economy and how you can prepare your business for success in the changing market.

Date: January 17, 2023
Time: 9 a.m. PT / Noon ET
Location: eXp World > eXp Commercial Auditorium

 

 

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https://www.creconsult.net/market-trends/2023-state-of-the-commercial-real-estate-industry/

Top 20 Property Management Companies of 2022

As many of our Multifamily Clients hire 3rd party Property Management Companies, we are sharing a recent review list of the top 20 Property Management Companies of 2022.

The best property managers efficiently run large multifamily investment properties, maintaining efficiencies and maximizing returns. If you have student housing, senior housing, income-based apartments, or any other type of multifamily investment property, these are the top 20 property management companies, according to the National Multifamily Housing Council. The NMHC has ranked these companies for 2022 in the following order and included some basic details about them.

Top Property Management Companies

The list of top-rated property management companies includes the largest ones in the country. Most of these companies manage properties regionally or nationally, and they all are responsible for 60,000 to 600,000 units.

Commercial Property Management Company

1. Greystar Real Estate Partners

Greystar Real Estate Partners is the largest property management company, with almost 700,000 managed units in 2022. That’s up slightly from the 669,00 units managed in 2021. The company is headquartered in Charleston, South Carolina, but has offices throughout the country and properties in all 50 states.

Uniquely, the company invests in property development in addition to property management. Greystar was listed in NMHC’s Top Owner, Top Developer, and Top Builder listings for 2022.

2. Lincoln Property Company

Lincoln Property Company is a distant second, with a stable 210,000 managed units in 2022 and 2021. The Dallas, Texas, company has a sizeable portfolio of military properties. It was also a 2022 Top Owner.

3. Cushman & Wakefield

Cushman & Wakefield is also based in Dallas and has a stable portfolio of ~170,000 units in 2021 and 2022. Current unit counts approximately match those from 2008. This is the largest listed company that’s steady but not growing quickly.

4. Asset Living

Asset Living continues to grow under CO Ryan McGrath’s 35+ years of leadership. The Houston, Texas, company jumped from 103,000 units in 2021 to 159,000 units in 2022. A number of these units are student housing.

5. FPI Management

Based in Folsom, California, FPI Management has ~140,000 units throughout the United States, excluding the Northeast. That’s up from 129,500 in 2021. The company has been expanding into the Southeast.

6. Apartment Management Consultants, LLC

Apartment Management Consultants, LLC is from Cottonwood Heights, Utah. The company grew approximately 13% from 2021 to 2022, increasing its unit count from 100,300 to 113,700. These are all market-rate units.

7. RPM Living

RPM Living is among the newest large property managers, having started in just 2020. The company grew from 81,500 units in 2021 to 112,000 units in 2022. The Austin, Texas, company is mostly in the Central and Southeast U.S.

8. BH

BH is a well-established property management company from Des Moines, Iowa. The company has steadily been increasing its portfolio for more than 20 years. The portfolio went from 100,000 units to 106,000 between 2021 and 2022.

9. WinnCompanies

WinnCompanies from Boston, Massachusetts, manages 103,000 properties throughout all 50 states. That’s nominally up from 101,000 in 2021. More than one-third is military housing. The company’s growth has been slow for the past ~10 years.

10. MAA

MAA from Germantown, Tennessee, has 100,000, which is the same as in 2021. These are all market-rate units throughout the Midwest, Central, and Southern U.S. The company was also a 2022 Top Owner, as it manages many of its own properties.

11. Morgan Properties

Morgan Properties develops and manages properties in the Midwest, South, and Mid-Atlantic. The company’s reach is increasing as it grows, however. The company increased from 94,300 units in 2021 to 96,100 in 2022. It’s also a 2022 Top Owner.

12. Avenue5 Residential, LLC

Avenue5 Residential, LLC has only been in business for 5 years, but those are 5 years of steady growth. It expanded from 75,800 to 86,900 units between 2021 and 2022. The company is out of Seattle, Washington.

13. Bozzuto

Bozzuto is slowly expanding through development. The firm was a 2022 Top Developer and went from 80,000 to 83,300 units between 2021 and 2022. These are throughout the West Coast, East Coast, and Upper Midwest. The company is in Greenbelt, Maryland.

14. AvalonBay Communities, Inc

AvalonBay is a 2022 Top Manager, Top Owner, Top Developer, and Top Builder from Arlington, Virginia. It’s slowly increasing units, which only went from 79,700 in 2021 to 80,500 in 2022.

15. Highmark Residential

Highmark Residential from Dallas, Texas, is cementing itself as a major property management company. It has 79,000 units, up from 68,300 in 2021. These are everywhere except the West Coast and New England.

16. Equity Residential

Equity Residential continues to be one of the largest property management companies, but its holdings are in decline. The Chicago, Illinois, company had 77,800 units in 2021 and just 77,300 in 2022. It is a 2022 Top Owner, however.

17. RangeWater Real Estate

RangeWater Real Estate is quickly making a splash, having grown to 74,100 units in just three years. Its 2021 count was 53,100. The newer company is based in Atlanta, Georgia.

18. Bell Partners

Greensboro, North Carolina, Bell Partners has had oscillating holdings over the past 13 years, but they increased from 62,400 to 68,800 between 2021 and 2022. The company is everywhere except the Midwest.

19. Edward Rose Building Enterprise

Edward Rose Building Enterprise has some of the most consistent historical growth. The continued trend took this company from 67,000 units in 2021 to 68,300 in 2022. The company from Bloomfield Hills, Michigan, is also a 2022 Top Owner.

20. Monarch Investment & Management Group

The Monarch Investment & Management Group is both a 2022 Top Manager and a 2022 Top Owner. The company went from 63,700 units in 2021 to 66,900 a year later. It’s based in Franktown, Colorado.

3 Things to Consider When Choosing the Best Property Manager

While these are the 20 top commercial property management companies, non of these companies is the best in every situation. The property manager that you choose should be specifically suited for your properties. These five considerations will help you determine which property manager is best suited for your particular properties:

• Region: The property management company should already have properties in your state, so they’re at least somewhat familiar with the local and regional markets.
• Specialty: If you have a student, senior, military, or other specific properties, look for a company that has lots of specialized housing already.
• Ratings: Good ratings by both professional organizations and tenants are marks of a quality property management company.

How Much Do Property Managers Charge?

The fees that property managers charge vary. Expect to pay 8 to 12 percent of rent as a property management fee. There can also be setup fees, repairs/maintenance fees, vacancy fees, eviction fees, termination fees, and other charges. Review any contract closely, as it’ll delineate all fees that a property manager charges.

Choose a Good Property Manager

If you need a property manager for one or more multifamily properties, these are some of the top property management companies throughout the country. One may indeed be well-suited for attending to your property. Investigate them further to find out which one company that is.

 

 

Source: Top 20 Property Management Companies of 2022

https://www.creconsult.net/market-trends/top-20-property-management-companies-of-2022/

Everyone Looks Good When CRE Is Doing Well. But What Happens When Things Get Ugly?

Where do smart investors put their money when the commercial real estate market is “pretty ugly”?

Walker & Dunlop CEO Willy Walker put that question to his three guests on this week’s Walker Webcast: Walker & Dunlop’s Ivy Zelman, executive vice president of research and securities; Kris Mikkelsen, executive vice president of investment sales; and Aaron Appel, senior managing director and co-head of New York capital markets.

Walker started the conversation by asking Zelman, co-founder of residential market analysts Zelman & Associates, to comment on her recent transaction survey that contained “some pretty depressing numbers” on the multifamily market and showed overall negative investor sentiment.

Zelman said the situation may change somewhat by the time she releases her November study this month but confirmed: “the October numbers were, no question, pretty ugly.”

“The metrics were across 12 years of data and were probably some of the worst metric results that we've seen,” Zelman said.

She noted that in the current economic maelstrom, underwriting has become much more stringent and rent assumptions more conservative, and the cost of capital has risen.

As a result, “It feels like the transaction market has come to a bit of a halt,” Zelman said.

Walker’s two other colleagues also painted a not very pretty picture of the state of CRE.

“It’s been an exceedingly challenging six months, as I think everyone that's listening to this call knows,” Mikkelsen said. “I would agree with some of the findings from Ivy’s report, particularly that the seller supply index is very, very low right now.”

He noted that transactions continue to get done, but that any optimism that may have blossomed in August around improving job numbers and other positive benchmarks ended the following month when it became clear that the Federal Reserve was maintaining its hawkish stance on inflation.

Appel noted that while the current environment is painful, not all CRE players are experiencing it in the same way.

“I think it depends on what you're doing,” he said. “For core, core-plus and value-add multifamily assets, there's plenty of liquidity, it just costs more. I think it's a cost of funds issue relative to what value is or what people are willing to pay. If their borrowing costs have increased substantially, then they need to pay less for the asset unless the revenues are going up, and clearly, revenues seem to have frozen in most markets.”

In light of this turmoil, Walker asked the panel what smart money is doing today.

Mikkelsen discussed a recent transaction involving “one of the savvier opportunistic investors in the market,” who was able to pay a good price for a multifamily asset that sits in a great neighborhood.

“They bought a phenomenal basis in the right location, and they've got the ability to hold that asset for the next five to 10 years,” Mikkelsen said. “This group has been doing 10-year floating rate debt and then hedging out or swapping the rate for the first five years to get them on the other side of the turbulence in the rate environment. So I think that's a pretty smart play.”

Zelman noted some CRE players see opportunities to acquire other businesses.

“I think that the smart money right now is taking advantage of the weaker players in the market that are not well-capitalized,” she said. “D.R. Horton announced an acquisition this week, and I imagine they got this builder at a pretty attractive price. I think that there's no question that to capitalize on those companies that are not well-positioned and have too much leverage, and to take advantage of good locations would be what the smart money will do.”

Appel noted that multifamily represents a greater share of the CRE market today, and going forward, “it’s going to be 50% of the market permanently.” At the moment, multifamily and industrial are the CRE asset classes that hold the most promise, he said.

“I would say that the smart money should be looking to buy multifamily at break-even leverage based on where today's rates are and to lock in what I would deem to be seven-year financing, with the ability to get out after five,” he said.

Appel said the Fed cannot keep interest rates elevated for an extended period. This bodes well for CRE investors who are willing to play the long game, he said.

“If you can buy break-even leverage in good rental markets where there's gonna be demand drivers and eventual employment drivers back on the horizon, and some level of supply constraint, I think you're gonna be a huge winner five, six years from now,” Appel said. “I think there's tremendous opportunity there.”

 

Source: Everyone Looks Good When CRE Is Doing Well. But What Happens When Things Get Ugly?

https://www.creconsult.net/market-trends/everyone-looks-good-when-cre-is-doing-well-but-what-happens-when-things-get-ugly/

Falling Housing Prices Signal Inflation Retreat Won't Be Far Behind

After over a year of unprecedented rent growth and soaring inflation, housing costs have been in retreat for three months.

Inflation measures, thanks to a lagging dataset, have yet to follow suit. But that could soon change.

In October, shelter made up the vast majority of the core consumer price index inflation measure, or more than 10 times what all other nonfood and energy sectors contributed, The Wall Street Journal reports. Yet when shelter costs were excluded, inflation all but vanished in the core consumer price index for October, mirroring what private sector research from entities like Zillow have observed in the housing market over the same period.

The Bureau of Labor Statistics bases its rent and estimated homeowner equivalent measures on what is actually being paid, while private estimates incorporate asking rents and newly signed leases, the WSJ reports.

As BLS data catches up to easing housing prices, inflation measures could retreat to near the Federal Reserve's target rate of 2% in the next few months, Piper Sandler Senior Economist Jake Oubina told the WSJ.

Though wage growth and employment rates are also focused of Fed policy, a retreat in inflation could give the financial regulator a signal that the aggressive interest rate hikes it pursued this year are no longer necessary.

If the Fed backs off on interest rates, it could in turn thaw the capital markets that have all but frozen for commercial real estate in the past few months.

Should inflation retreat along a friendly timeline and the Fed respond promptly, a significant recession may not happen, despite seeming like a near certainty to some in October.

Steep drops in value for several property sectors may represent the deflating of bubbles, as banks held to tighter underwriting and balance sheet standards implemented in the wake of the Great Financial Crisis, Bloomberg reports.

 

 

Source: Falling Housing Prices Signal Inflation Retreat Won’t Be Far Behind

https://www.creconsult.net/market-trends/falling-housing-prices-signal-inflation-retreat-wont-be-far-behind/

Multifamily sellers: How to qualify a buyer before going under contract

Multifamily sellers: How to qualify a buyer before going under contract

Don’t waste time and opportunities: learn how to select the right buyer every time

As the seller of a multifamily asset, it’s crucial that the buyer you select is the best possible prospect for your property. Don’t waste time, money, and opportunities: you must ensure they’re qualified and can close and execute the contract as signed.

Keep reading to learn why it’s essential to qualify a buyer before going under contract on your multifamily property and how to do it.

Why do I need to qualify a buyer?

It’s important to close with the first buyer you select. If you don’t, each buyer after that will ask themselves, “What did that other buyer discover about this property that I am missing?”.

When you enter into a contract with a refundable deposit, you’re basically giving your chosen buyer a free option on your property for a period of time, typically 30–60 days. Before you proceed, you must be confident that they can close and execute the contract as signed.

What’s more, your tenants and staff will be disturbed throughout the contract process. To minimize the period of disruption, you should do all you can to ensure the transaction will close successfully at the end of the contract process.

As a seller, you’re required to provide due diligence information to the prospective buyer. When you qualify your buyer, you’ll greatly reduce the risk of wasting a lot of time and doing a lot of work only to not close on the property.

How do I qualify a buyer?

Before you sign the contract, make sure that your prospective buyer can provide certain items. Always ask them for the following:

– Proof of funds

– Lender pre-qualification

– A list of the other properties they own

– A list of the sellers and agents that they have worked with

For added reassurance, it’s recommended that you call the buyer’s lender to confirm their pre-qualified status. You can also call the agents, sellers, and buyers they’ve closed with in the past to enquire about how the transactions went.

Has the buyer toured the property in person before making an offer? Have they reviewed the due diligence information beforehand? If they have, this is a great sign. It’s proof that they have seen and have taken into account any issues with your property, and this greatly reduces the chances that they may later want to back out of the sale, saying they were unaware of the building’s condition. Be very wary of a buyer who doesn’t tour your property in person.

A prospective buyer who shows they’re motivated and wants to move quickly is also a great sign for a successful closing. The shorter the due diligence period, the better, and the larger the deposit, the better.

When you spend the time making sure your prospective buyer fulfills these criteria, you’ll put yourself in a great position to close successfully and ensure a quick and smooth transaction.

If you need help selling your multifamily property, eXp Commercial is here. Our objective as your multifamily advisor is to help you achieve your investment goals: from determining the listing price to selecting the best buyer and handling the sale process through to the closing, we’ll facilitate a smooth transaction for you.

 

Source: Multifamily sellers: How to qualify a buyer before going under contract

https://www.creconsult.net/market-trends/multifamily-sellers-how-to-qualify-a-buyer-before-going-under-contract/

Happy Holidays

HAPPY HOLIDAYS FROM EXP COMMERCIAL! Wishing everyone a wonderful Holiday Season and a Happy, Healthy, and Prosperous 2023! For any Multifmaly Buying, Selling, and Financing needs, please keep us in mind all year long. Randolph Taylor, Chicago Area Multifamily Brokerage (630) 474-6441 | rtaylor@creconsult.net https://www.creconsult.net/ #chicagomultifamilybrokerage #multifamilybroker #apartmentbroker #multifamilyagent #apartmentagent

Do I need an attorney for my commercial real estate deal or is my broker enough protection?

Does a seller or a buyer of commercial real estate really have to hire an attorney? The unmistakable answer is, "Yes!"

A broker is a licensed professional who you hire to negotiate the sale or purchase of a real estate for a fee or a commission. However, they are typically not attorneys. Many of them will clearly state that real estate brokers are not providing legal advice. Real estate brokers don’t usually get paid unless they close the deal (or unless you are somehow obligated to pay a commission, for example, by withdrawing from a deal). Therefore, brokers are usually not going to take care of the legal details and may even try to push a deal to close as fast as possible.

Be sure that separate legal advice from a good real estate lawyer is usually worth the additional cost. It's much more cost-effective to hire an attorney to get the deal done right than to get involved in an expensive lawsuit.

A good attorney can also be crucial to getting a beneficial purchase. Also, keep in mind that it’s best to hire an actual commercial attorney who deals with this kind of transaction daily. It may cost a bit more than a general lawyer, but it’s well worth it.

What does a real estate attorney actually do?

The job of a real estate lawyer is to negotiate and make a transaction happen in a peaceful way that's amenable and fair to all parties.

A real estate lawyer takes over after the selling terms and price have been determined by the real estate brokers in the contract, and the parties have signed. At that point, a real estate lawyer reviews the contract and negotiates any necessary adjustments to deal with terms. In case any last-minute issues come up, the lawyer will be at your closing, together with your real estate agent.

Experts believe you should always hire a real estate lawyer, no matter your circumstances, because it’s an added layer of protection for both sides, which covers the buyer and seller for all of the contract items. It’s simply a necessary level of protection for large purchases or sales.

Some brokerages even offer the services of a real estate lawyer and broker in one at no additional cost.

A commercial real estate transaction includes many complicated steps, and if the seller hires an attorney early in the process, the lawyer can help the seller to both protect their benefits from the sale and avoid liability if unexpected issues come up.

Many sellers, even the ones that hire an attorney later to prepare the closing documents, don't hire a lawyer during the listing stage, which is also a mistake. Even though Listing Agreements seem to be "standard," many agents are willing to negotiate the terms and conditions.

Either way, both commercial real estate sellers and buyers should engage their own lawyer as early in the process as they can to ensure their best interests are being met throughout the whole real estate transaction.

 

Source: Do I need an attorney for my commercial real estate deal or is my broker enough protection?

https://www.creconsult.net/market-trends/do-i-need-an-attorney-for-my-commercial-real-estate-deal-or-is-my-broker-enough-protection/

How Will Rising Costs (CPI) Affect Real Estate Investments

The Consumer Price Index (CPI) measures the year-over-year percentage change in the average retail price of products and services that are typically purchased by households. The Bureau of Labor Services collects about 94,000 prices from 23,000 establishments monthly to calculate CPI. CPI is one of the main measures of inflation. A survey on the rental prices for 43,000 units also occurs, making up a third of the overall CPI, which is then used to calculate the increases in rental prices.

Because there is a correlation between inflation and goods with a limited supply, CPI also impacts real estate investments and housing costs. Here’s how rising costs affect real estate investments and why making smart real estate purchases can benefit you in periods of high inflation:

Rising construction costs

Inflation leads to the increase in prices of many aspects of the construction process, including building materials, machinery hiring rates, and consultant fees. With the costs of labor and construction materials increasing, real estate developers aren’t too keen to invest in any new developments. They will likely wait for inflation to ease and for prices to go down. Projects that are under development may also be delayed as construction costs become too expensive and investors worry about their profit margins.

Higher mortgage rates

In high-inflation environments, interest rates increase, and consequently, so do mortgage rates. When interest rates are low, more people are likely to borrow money. But as inflation moves higher, banks and other financial institutions raise interest rates to make borrowing less appealing. The goal is to lessen consumer consumption, which will help ease inflation. Overall this should slow transactional volume for real estate purchases, as many may people may be priced out of purchasing due to higher mortgage payments. Typically, as demand wanes, sellers will adjust pricing downwards to compensate.

Rising asset prices

When inflation rises, so does the cost of living and with it comes increasing real estate prices. Rising construction costs lead to fewer new developments, which leads to limited supply. Higher interest and mortgage rates also mean fewer people borrowing money to invest in real estate. All these factors lead to low supply, resulting in increased demand for an existing property. And with amplified demand in those properties comes an increase in their asset value.

Better performance for residential properties

During inflationary periods, residential properties such as condominiums, single-family, and multi-family properties tend to perform better. With higher building costs and more difficulty borrowing money, people will turn to renting more than buying. Commercial real estate also tends to perform better during periods of high inflation, especially those properties that have long-term leases in place, with set rental increases, allowing for the investor to “park” their money and still receive their anticipated returns until the economy improves.

Increase in rent prices

Historically, high periods of inflation have resulted in increases in rent prices. Investors use real estate to hedge inflation by taking advantage of the limited supply and leases that include annual rental increase clauses. Low inventory makes existing properties more in demand. Property owners can also justify the rental increase due to higher maintenance costs as a result of inflation and increased prices on consumer goods and services. Therefore, people with existing residential and commercial real estate tend to reap significant benefits during inflationary environments.

 

Source: How Will Rising Costs (CPI) Affect Real Estate Investments

https://www.creconsult.net/market-trends/how-will-rising-costs-cpi-affect-real-estate-investments/

Should I Sell or Should I Hold? When is the best time for asset repositioning?

When it comes to selling their investment properties, clients typically ask me,’ Why should I sell?’ Great question. Why should you sell? The obvious answer is that you purchased the investment property as an investment, and it may not be doing as well as other investment opportunities, and after a while, you don’t realize the appreciation and thus maximization of profit from the property until you sell and acquire another investment property. So the question is really, ‘When should I sell? Clients really lose the perspective of the driving reason why they invested in an investment property in the first place. An investment property is just that; an investment. Treated as such, every investment must have a horizon and an exit strategy. If a property was purchased as an investment, then it makes full sense to profit as much as possible from the investment.

The real estate market, like any other market, will go through peaks and valleys. Trying to predict the exact moment of peak or the exact moment the market reaches the bottom is practically impossible. The real estate cycle has four phases; recovery, expansion, hyper supply, and recession. The complete real estate market cycle seems to have an average duration of about 18 years as there is good historical data to support that. So, where are we in that cycle now? How much more upside will we see before we reach the peak? The question really is, ‘What is your appetite for risk?’

Below is a chart of the real estate cycles dating back from the 1800s. The last real estate market crash started at 2006. We are almost 16 years into that cycle. Interest rates are still at all-time lows. Money is cheap, and the threat of inflation is very high. How long can government print money without paying the price down the road? How much road do we have left?

So when is a good time to exit an investment property? As with everything else, real estate is cyclical. Those of us that have been around for some time have witnessed several cycles in the real estate market. Since it is practically impossible to predict the peak of cycles, what strategy should you then use to maximize your investments? Keeping it simple, when evaluating if you should consider selling an investment property, it doesn’t really matter what the current real estate market is like. If you are looking to replace the investment property with another investment property, the ultimate decision to sell should also be based upon if you can increase your returns with the new replacement property, not what state the current market is in now.

There are a number of factors that can impact real estate prices; availability, investment potential, and interest rates, to name a few. Interest rates impact the price and demand of real estate—lower rates bring in more buyers due to the lower cost of money but also expand the demand for real estate, which can then drive up prices. As interests rate starts to inch up, the cost of money increases, and thus the appetite for real estate investments declines.

However, there are many ways that one can still protect their investments. 1031 Exchanges give investors a vehicle to reposition assets and mitigate risk. There are certain asset classes that inherently hold less risk and still perform as an investment vehicle. The questions really come down to; ‘How long do I hold on during this cycle? Do I have the time horizon to outlast another cycle? Is it time to reposition and take advantage of 1031?

As part of the team for our client’s investments, we specialize in building solutions around our client’s needs. We analyze the requirements, crunch the data, and present assets entirely based on their circumstances and the goals they are trying to achieve with their investment.

Have you thought of selling your property and would like to know what it’s worth? Request a valuation for your property below:

Request Valuation

 

Source: Should I Sell or Should I Hold? When is the best time for asset repositioning?

https://www.creconsult.net/market-trends/should-i-sell-or-should-i-hold-when-is-the-best-time-for-asset-repositioning/

Purchasing Rental Properties With Existing Tenants

LINK TYPE FOR ENTRY VIEWPurchasing a rental property with existing tenants sounds like a no-brainer: After all, the issue of locating tenants in the first place is solved, right? Maybe, but there's more to it than that.

You must understand what you're getting into before diving headfirst into a tenant-occupied rental property purchase, especially if you're new to commercial real estate investing and being a landlord.

Here is what you need to know when purchasing an apartment with tenants.

Existing Tenant Leases Are Still Legal

A lease is a legal agreement that exists between tenants and landlords. It doesn't disappear when the building is sold.

If you buy the apartment, the leases remain attached to the rental property. Therefore, you cannot raise the rent, change any terms, or evict the tenants just because you purchased the apartment. There are hurdles you must go through if you wish to break the current leases.

Exceptions to & Tactics for Breaking Existing Leases

There are two exceptions when you can break the leases. You can provide written notice to end a tenancy if the term of your rental agreement specifies that the owner may terminate the contract at any point.  Or, if you're purchasing the apartment as a foreclosure, then you can give the tenants proper notice before ending their tenancy.

If you don't want the tenants because you'd prefer to start from scratch, you could submit an offer to the owner contingent on the tenants vacating when the apartment sells. This requires the seller to break the leases before the property is sold.

You cannot raise the rent or evict tenants without going through legal channels. So, if you want to change anything about the arrangement, such as raising the rent or kicking someone out, you'll have to go through the courts.

Existing Tenants: The Good and the Bad

"Existing tenants" means all people were already living in the building before it was purchased.

Buying an investment property with tenants already living there may be ideal. This means instant cash flow, no time to look for the right tenants to live in your apartment, and if the tenants have been living in the house for an extended period, you have a limited chance of the apartment becoming vacant soon.

Screening & Vetting Tenants, Both Existing & Otherwise

Tenant Screenings are essential for protecting your investments. Poorly screened tenants can cause havoc by not paying their bills, causing damage to your properties, and dragging out evictions. However, when you inherit an existing tenant, you're stuck relying on the previous landlords' tenant screenings, which may be lacking in quality.

The buyer could have accepted anyone (regardless of qualifications), or he might have had a long-time tenant who refused to pay rent on time or even not at all.

Landlords beware: they may be trying to sell their property to offload their tenant problem onto an unsuspecting buyer.

Other Roadblocks With Existing Tenants

You may encounter other obstacles when dealing with existing renters. For instance, you might find that the current residents are dream renters, but they're not prepared to continue living there under a new owner.

A move from one rental unit to another may cause some disruption for a tenant. However, if your new tenants have been living in their previous rental unit for a long time, they may feel at home.

If the previous landlord wasn't raising the rent annually, or if they weren't performing regular seasonal inspections, you might find that your new tenant doesn't wish to move.

How to Deal With Existing Tenants When Buying a Rental Property

There are three main ways to handle existing tenants when buying a property:

1. Pay them off. If you decide to pay the current owner to remove the tenants, you'll most likely have to pay them the total amount owed plus any additional costs associated with removing them.
2. Let them stay. If you decide to keep the tenants, you'll have to find a way to work around the fact that they aren't technically breaking the lease.
3. Convince the tenants to agree to a new lease that allows you to raise the rent or add more terms to the agreement.

Tasks to Perform Before You Finalize the Purchase

Before you close on a rental property that is occupied, you must perform several tasks to ensure the process goes smoothly.

To begin with, introduce yourself to your new tenants by writing them an introductory email. This will help them get used to living with you and establish an excellent tenant-landowner relationship.

Furthermore, it will allow you to add important information, such as where rent payments must be made and how tenants may request repairs.

Protecting Yourself as a Landlord

Since you will assume the responsibility of the previous owner, it is vital that you fully protect yourself by instructing them to sign an estoppel letter and transfer their security deposit to you.

An estoppel clause lets your future tenants specify which existing leases they want to continue under. It usually covers rent, utilities, parking spaces, etc., but not everything.

You must ensure the previous owner signs an agreement releasing you from any liability for damage caused by their tenant.

It will help prevent any potential legal issues from arising later down the road. If someone makes an untrue claim against you, you can use the estoppel agreement to refute it.

Always Do Your Research and Stay Diligent

Buying an investment apartment is an exciting prospect for people looking to start generating immediate cash flow from their properties.

When buying an occupied apartment, before signing any paperwork, read the lease agreement and check out the tenant qualifications the seller used to qualify current tenants.

If you agree to the rental conditions and feel comfortable with the current tenants, continue with an introduction and sign a cooperative estoppel agreement.

If the current occupants are month-to-month residents, you have more options for changing their lease and tenancy if they meet state and local law requirements.

 

Source: Purchasing Rental Properties With Existing Tenants

https://www.creconsult.net/market-trends/purchasing-rental-properties-with-existing-tenants/

Inflation and Multifamily Real Estate: What to Expect for 2023

Multifamily investors and employees are facing persistent financial pressures, including record-breaking inflation, enduring supply chain constraints, rising interest rates, and plummeting consumer confidence. These concerns leave many rental housing owners and managers wondering: what does the future hold for the multifamily industry?

While U.S. inflation has recently eased, it remains near a 40-year high, according to AP News. Consumers continue to feel their spending power strained by still higher-than-average prices on everything from gas to groceries. Many are tightening their belts as a result. Owners and operators of rental communities are justifiably concerned about the future forecast for multifamily rentals. Will 2023 be a bumpy ride?

 

Record rental growth and high occupancy may be ending.

Amid the tumult and uncertainty of the pandemic in the U.S. for the past two-plus years, the rental housing industry was buoyed by record demand for apartments and surging rental rates. The New York Times reports that according to CoStar Group, “in buildings with more than 50 units, tenants in one-bedroom apartments have been handed new leases costing about 17% more on average than they did in March 2020.”  Multi-Housing News shared that according to Yardi Matrix’s survey of 140  markets, the average U.S. asking rent rose 12.6% year-over-year through July 2022, while the national occupancy rate remained similarly strong at 96% for the fifth straight month.

Are there signs that demand for rental housing is waning? RealPage analyst Jay Parsons puts it bluntly: “A number of indicators suggest the once blazing-hot rental housing market is cooling off dramatically.” He continues, “Apartment demand has cratered from 2021’s all-time highs due to what appears to be an abrupt halt in housing formation.” Data from Yardi Matrix, as reported by Multi-Housing News, also shows a deceleration of growth. “August marks the first month since June 2020 with tepid rent growth…a trend that will likely linger by the end of the year.”

Cratering apartment demand, a halt in housing formation, and deceleration of growth – it sounds ominous. What does it mean for owners and operators of multifamily housing?

 

A return to normal

According to Multi-Housing News, “While record rent growth in 2021 was the result of record-high absorption (580,000 units), the softening in absorption—roughly half that pace in 2022—does not send negative signals but is instead falling into values representative of a typically solid year.”

RealPage’s Parsons also sees normalcy in the recent leveling out of apartment demand. According to RealPage’s analysis, leasing traffic slowed in the third quarter of 2022 (typically seasonally a strong leasing period), and effective asking rents fell month-over-month for the first time since December 2020. Despite that, Parsons says this marks a return-to-normal seasonal pricing. “To be clear, the U.S. apartment market remains on firm footing,” explains Parsons. “Apartment vacancy jumped 1.0 percentage point in 3^rd quarter but remained low at just 4.4%.”

Realtor.com’s chief economist Danielle Hale spoke to CNBC about her predictions for multifamily rents in 2023. Said Hale, “My expectation is that rent growth will slow, but we may not see it go back to what was typical before the pandemic.” Instead, she anticipates rent price growth, while not as dramatic as in 2021-2022, will likely remain elevated well into the New Year.

 

Impact on multifamily transactions, construction starts.

Rising material costs, higher interest rates, and ongoing economic uncertainty have a big impact on the new construction of multifamily apartment communities and build-to-rent single-family homes, as well as sales of established rental housing. According to the Freddie Mac Multifamily’s 2022 Midyear Multifamily Outlook, “a steep rise in Treasury rates may push potential deals to the sidelines as borrowers wait out the volatility.”

Similarly, RealPage’s Parsons anticipates a drop in new construction starts of multifamily communities. “New apartment starts are expected to soon drop from multi-decade highs due to higher financing costs and softening fundamentals,” says Parsons.

A reduction in construction starts may keep rents and occupancies high. That’s because the U.S. is already facing a dire shortage of rental housing. A recent study commissioned by the National Multifamily Housing Council and National Apartment Association and reported in Multi-Housing News reveals that the U.S. needs to build 4.3 million new apartments by 2035 to address demand, deficit, and affordability. Put simply, demand for rental housing is outstripping supply which keeps both rents and occupancy rates high.

 

Continued optimism for rental housing as an investment and employer of choice

While rising inflation can be both disruptive and worrisome to multifamily owners, investors, and employees, the outlook for rental housing remains favorable. Real estate investment expert Adam Kaufman sees abundant reason for optimism. “Multifamily assets in particular, tend to perform well in an inflationary period,” he tells Forbes. “Economic growth fuels employment and higher wages, which in turn drives demand for housing. At the same time, the housing market, in general, faces a chronic shortage of some 5 million units. Together, those conditions give multifamily owners the ability to raise rental rates and offset higher construction, labor, insurance, taxes, and other costs, potentially allowing multifamily properties to hedge the effects of inflation.”

RealPage’s Parsons puts it even more plainly: “At the end of the day, people need a place to live. You can work from anywhere and shop from anywhere. But you need a home. That’s a long-term tailwind for housing of all types.”

Those are reassuring perspectives for multifamily professionals, whether they are building communities or building careers.

 

Source: Inflation and Multifamily Real Estate: What to Expect for 2023

https://www.creconsult.net/market-trends/inflation-and-multifamily-real-estate-what-to-expect-for-2023/

Multifamily Rent Roll Curation - Next Steps in Portfolio Management

Real estate investors typically diversify their geographic footprint to reduce their overall portfolio risk profile. But what if investors dug deeper and proactively diversified their property-level rent roll to minimize risk exposure for a given asset? Multifamily owners could soften the impact of market downturns on their portfolio and potentially take a more bullish approach to other risk levers in the portfolio, such as leverage or geographic concentration if high conviction opportunities presented themselves.

Portfolio Theory

"A good portfolio is more than a long list of good stocks and bonds. It is a balanced whole, providing the investor with protections and opportunities with respect to a wide range of contingencies." - Harry Markowitz.

Portfolio Theory is a framework for investing. It states that if you combine assets with low or negative correlations, you reduce the overall risk of your portfolio. An example could be oil company stocks and airline stocks, which typically move in opposite directions as the price of oil changes (since oil is a significant expense for airlines).

 

Potential Multifamily Applications

Multifamily risks are likely higher than many investors realize. This asset class benefits from government-subsidized financing, which encourages higher leverage due to the lower interest rates. High leverage increases the risk profile of the investment, and when combined with higher pricing from the surge in investor interest in multifamily properties in recent years, the financial risk profile of multifamily is increasing.

Tenant rent roll curation can lower risk at the individual property level. For example, in an economic downturn, your property performance could be higher than the overall market or submarket (lowering your property's beta) because you, the owner, have proactively selected tenants that collectively reduce your risk profile. Your rents may still fall, but at lower rates than the submarket.

Additionally, the proactive tenant curation model can offer valuable insights into the risk profile of your tenant base, allowing for more accurate forecasting and portfolio-level risk assessments.

How It Works

Let's consider a multifamily property in Las Vegas.

Las Vegas was one of the most impacted markets during the Great Recession of the late 2000s. The employment loss was significant, and investors suffered from lower rents and decreasing values.

However, not all employment sectors fared equally.

Source: Bureau of Labor Statistics

The Education and Health sector (defined by the BLS) performed much stronger than the broader employment trend. The Education and Health segment never reached year-over-year negative job losses as the industry was insulated from the broader economic trends of the day. This sector comprised 10.7% of the Las Vegas employee market as of June 2022.

Property in Las Vegas (a highly cyclical market) with a high proportion of tenants from stable employment sectors should have improved performance compared to comparable properties with tenants from more volatile sectors.

Great. I’ll buy a property next to a medical center.

The Great Recession was one of the most severe recessions in recent times (before Covid-19) and could be a helpful benchmark in the absence of a global pandemic.

Yes, you can invest in an asset adjacent to a medical center where investors can benefit from these strong and stable employment trends. But market participants already know this - thus, the price will likely command a premium. Intuitively, many investors assume that medical or educational employers (like universities or hospitals) are anchor employers that offer growth opportunities and stabilize the surrounding job market.

Yes, you can acquire it, but you'll pay a premium for the luxury of tenants with stable employment bases.

There Is Another Solution – Remote Work

The Covid-19 pandemic has offered employers (and employees) an experiment in remote work. Millions of people are no longer geographically tied to their employers. From a real estate perspective, they have become free agents.

The distribution of these remote workers is still shifting as employees assess their options. According to McKinsey, an estimated 35% of employees can work from home five days a week, which offers the possibility of migration to a better lifestyle or financial opportunities.

Since remote workers are not tied to their geography, they can tap into the national remote labor market, which is much larger. Although data on the topic seems sparse (since it’s a new phenomenon), it seems possible that skilled remote workers could benefit from lower overall unemployment rates since their employment pool is deeper and more liquid.

We are likely at the beginning of an unprecedented sorting wave as the population assesses their options across national and international borders. Multifamily investors can take advantage of this process by targeting remote workers directly. They can use remote workers as the portfolio management tool to curate their rent roll and position it for success according to their goals.

How To Do It?

Organize your property to appeal to the target audience. Remote workers likely value the basic amenities, such as high-speed and reliable internet access, as well as community-focused amenities, such as expansive WeWork-style common areas, since they don’t have physical meetings with colleagues.

A disproportionate investment in amenities that appeal to the target audience is a solid signal to the target market that they are sought-after.

Additionally, financial incentives can be tailored to the target audience. For example, multifamily owners have long used tools such as preferred employer discounts to entice residents to rent their units. Unfortunately, these discounts are usually expensive (3% of gross rent) and lack precision (targeting only the largest employers in the area). Instead of ongoing discounts, upfront cash incentives can be used as a lower-cost option.

Much more can be done to attract and retain these targeted residents, and these ideas need to be crafted into a distinct marketing strategy.

The Potential Impact

The above example, based on Indeed.com job listing data (for Pre-Covid and May 2022), illustrates the potential diversification benefits of remote worker hubs at multifamily properties. The nationalization of the tenant risk profile from (9.4% to 40%) should reduce the overall risk exposure – possible without reducing the property’s Net Operating Income.

However, investors would not need to immediately target this proportion of units to the strategy to experience benefits. Instead, a step-by-step approach could be implemented with a handful of units being tested until the strategy has been proven.

The addition of high-income tenants who don’t rely on the local labor market can be used to bolster valuations. Additional monetization opportunities could be researched to capture a higher wallet share of the target tenant base.

Summary

Portfolio management can move from macro to micro through the proactive use of job category targeting across individual property rent rolls and overall diversification benefits from lower reliance on local labor markets. This curation can unlock significant additional value above and beyond the expected return from a multifamily property in that location (your beta).

We are in the early innings of remote worker sorting across the country. It will present opportunities for investors and workers to create more win-win dynamics as new needs are recognized and satisfied in the market.

 

Source: Multifamily Rent Roll Curation – Next Steps in Portfolio Management

https://www.creconsult.net/market-trends/multifamily-rent-roll-curation-next-steps-in-portfolio-management/